Our Opinions

King IV Draft Report : Our initial response

A leading newspaper requested Candor Governance to provide a critique on the King IV Draft Report a day after its release. This was our response:

Environmental, societal and business changes make it necessary for governance codes to be reviewed regularly. We believe that King™ IV Report has substantially met these changing needs.

Internationally King III’s 75 principles were deemed a few steps too far. We are pleased that the principles have been reduced to 16 (or 17 for institutional investors). Equally pleasing is the fact that the basis of the draft report remains an ethical culture and effective leadership.

One of the main foundational concept innovations is an emphasis on governance outcomes. A focus on outcomes should ensure the governing body’s focus goes beyond boardroom procedures to implementation and effect on the organisation.

It is also pleasing to see the evolution from integrated reporting to integrated thinking. We are, however, aware that most organisations do not yet prepare integrated reports, and perhaps a continued improvement model could have been adopted.

Reducing the number of chapters to 5 also enables a more integrated approach. We believe that the substance has not been compromised by combining select King III chapters as we have found that, in practice, most organisations already combined governance disciplines. The tone of King™ IV detail also seems more instructive than previous codes.

As a governance solutions provider we regularly deal with organisations that believe that governance codes do not apply to them due to size, industry or ownership structures. As such, the inclusion of sector supplements should go a long way to making King™ IV relevant to all organisations. It remains doubtful whether most SMEs will apply a governance code without external incentives.

While Information and Technology governance is still rising in importance, Candor Governance believes more emphasis should have been placed on change management. Rapidly changing legislation, technology and business requirements means that organisations should be “built for change”. The procedures of governing bodies should provide guidance and oversight for these constant changes.

Emphasising select governance issues is a further enhancement of King™ IV. The governing body responsibilities have been elegantly summarised as providing strategic direction, determining policies for implementation, oversight of performance and implementation and disclosure. Placing tax strategies on the boardroom table reflects the change in business culture and mirrors best practices. Enhancing the disclosure of auditor tenure will ensure a higher level of auditor independence.

It is our opinion that the governance of remuneration policies and practices remains central to managing stakeholders’ agency risk. King™ IV’s enhanced disclosure requirements of remuneration practices will go a long way to managing that risk. We endorse the comparison of executive remuneration with other employees. We also urge the JSE to ensure that all listed entities provide detailed disclosure of their remuneration practices.

Finally, while integrated thinking may assist governance procedures influencing operations, Candor Governance believes that more emphasis is required to link board level policies to the operational coal-face. A structured and systematic link between governing body guidance and the organisation’s transactional level, as well as real-time reporting through management layers back up to the board, is the only way to ensure a consistent and uniform ethical culture.